Partial Adjustment to Public Information and IPO Underpricing

Bradley, Daniel; Jordan, Bradford D.

doi:10.2307/3595013

Cited by 444 publications

(400 citation statements)

References 30 publications

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“…The lower magnitude of initial returns following negative information indicates that negative information is more fully incorporated into the offer price, compared to positive information. In a contemporaneous paper, Bradley and Jordan (2002) obtain similar results. They show that decreases in the file range (in amended prospectuses) have a smaller impact on initial returns than increases in the file range.…”

Section: The Adjustment Of Ipo Prices To Public and Private Informationsupporting

confidence: 71%

“…First, is public information fully incorporated into the initial price range? Prior literature (e.g., Hanley, 1993;Loughran and Ritter, 2002a;Bradley and Jordan, 2002) has used the midpoint of this price range as an unbiased predictor of the ultimate offer price. Our empirical tests provide the first evidence on the validity of this assumption.…”

Section: Introductionmentioning

confidence: 99%

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Is the IPO pricing process efficient?

Lowry¹,

Schwert²

2004

Journal of Financial Economics

335

195

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Section: The Adjustment Of Ipo Prices To Public and Private Informationsupporting

confidence: 71%

Section: Introductionmentioning

confidence: 99%

Is the IPO pricing process efficient?

Lowry¹,

Schwert²

2004

Journal of Financial Economics

335

195

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“…In the 1990s, larger offers were underpriced more than smaller ones, and IPOs with a prestigious lead underwriter were underpriced more than those without. 5 In the 1990s and internet bubble years, IPOs had high returns when a relatively small fraction of the firm was sold in the IPO, as measured by the ratio of retained shares to issued shares, called share overhang by Bradley and Jordan (2002). But this pattern was not present in the 1980s.…”

Section: Univariate Sortsmentioning

confidence: 96%

Why Has IPO Underpricing Changed Over Time?

2002

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In the 1980s, the average first-day return on initial public offerings (IPOs) was 7%. The average first-day return doubled to almost 15% during 1990-1998, before What explains the severe underpricing of initial public offerings in 1999-2000, when the average first-day return of 65% exceeded any level previously seen before? In this article, we address this and the related question of why IPO underpricing doubled from 7% during 1980-1989 to almost 15% during 1990-1998 before reverting to 12% during the post-bubble period of 2001-2003. Our goal is to explain low-frequency movements in underpricing (or first-day returns) that occur less often than hot and cold issue markets.We examine three hypotheses for the change in underpricing: 1) the changing risk composition hypothesis, 2) the realignment of incentives hypothesis, and 3) a new hypothesis, the changing issuer objective function hypothesis. The changing issuer objective function hypothesis has two components, the spinning hypothesis and the analyst lust hypothesis.The changing risk composition hypothesis, introduced by Ritter (1984), assumes that riskier IPOs will be underpriced by more than less-risky IPOs. This prediction follows from models where underpricing arises as an equilibrium condition to induce investors to participate in the IPO market. If the proportion of IPOs that represent risky stocks increases, there should be greater average underpricing. Risk can reflect either technological or valuation uncertainty. Although there have been some changes in the characteristics of firms going public, these changes are found to be too minor to explain much of the variation in underpricing over time if there is a stationary risk-return relation.The realignment of incentives and the changing issuer objective function hypotheses bothWe thank Hsuan

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“…A potential concern with the results on Offer Price Revision is that it is highly correlated with the level of underpricing as shown by Hanley (1993) and Bradley and Jordan (2002). To understand whether the offer price revision is simply another measure of underpricing, we examine whether the two variables affect M&A volumes in an identical manner.…”

Section: Determinants Of Stock Financed Acquisition Activitymentioning

confidence: 99%

Going public to acquire? The acquisition motive in IPOs

Çelikyurt

Sevilir

Shivdasani

2010

Journal of Financial Economics

219

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Newly public firms make acquisitions at a torrid pace. Their large acquisition appetite reflects the concentration of IPOs in M&A intensive industries, but acquisitions by IPO firms also outpace those by mature firms in the same industry. IPO firms' acquisition activity is fueled by the initial capital infusion at the IPO and through the creation of an acquisition currency that is used to raise capital for both cash and stock financed acquisitions along with debt issuance subsequent to the IPO. IPO firms play a bigger role in the M&A process by participating as acquirers than they do as takeover targets and acquisitions are at least as important as R&D and CAPEX for their growth. The pattern of acquisition activity following an IPO is important in explaining the evolution of ownership structure of newly public firms. JEL Codes: G32, G34Address Correspondence to Anil Shivdasani * We thank Uli Hege, Chris James, Michelle Lowry, Henri Servaes, and participants at the 2008 AFA meetings, the RICAFE Conference, the ESSEC Private Equity Conference, the 2007 Jackson Hole Finance Conference, and at University of North Carolina for helpful comments. 2 IntroductionWhy do firms choose to go public? An IPO is one of the most consequential events in the life of a company, but our understanding of this decision remains incomplete. Existing theories offer several insights for why firms decide to go public. In theory, an IPO creates liquidity for the firm's shares, provides an infusion of capital to fund growth, allows insiders to cash out, provides cheaper and ongoing access to capital, facilitates the sale of the company, gives founders the ability to diversify their risk, allows venture capitalists and other early stage investors to exit their investment, and increases the transparency of the firm by subjecting it to capital market discipline. Weisbach (2008) show that financing of capital expenditures and the desire to benefit from potential overvaluation are motives for seasoned equity offerings (SEOs) and IPOs.We study a relatively unexplored motive for IPOs -the desire to make acquisitions. We conduct a number of tests to provide some insight on the determinants of post-IPO M&A activity. Our first observation is that the M&A activity of IPO firms is strongly linked to the amount of M&A activity within their industry. In other words, IPOs tend to occur in industries with high M&Aactivity. Yet, industry clustering of IPOs and M&A does not fully explain the acquisition appetite of IPO firms -by most benchmarks, IPO firms are more prolific acquirers than the mature public firms within their industry.We consider three potential avenues by which an IPO can facilitate future M&A activity and explore whether these explain the acquisition volumes by IPO firms. An IPO can allow companies to pursue M&A by providing an infusion of cash, by opening the possibility of paying for an acquisition with overvalued stock, and by resolving the uncertainty about the pre-IPO valuation of the firm and the 1 In other work, Brown, Dittmar...

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Partial Adjustment to Public Information and IPO Underpricing

Cited by 444 publications

References 30 publications

Is the IPO pricing process efficient?

Is the IPO pricing process efficient?

Why Has IPO Underpricing Changed Over Time?

Going public to acquire? The acquisition motive in IPOs

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